All Forum Posts by: David Weiss

Brian Fouts, I would be very curious to hear how your team legally addresses Due on Sale to prevent it from being a future problem. Thanks!

Bill Gulley, thank you for clarifying that you don't take exception to my ethics. For the most part it has been clear to me that you were questioning the ethics of the mentor or his attorney partner, but the clarification helps.

I am unclear why the passage quoted by Kelvin K. would arouse your ire:
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The prospective mentor's agency has completed over 1500 sub2/wrap transactions and only 3 have had "Due on Sale" clauses called. We will have a loan servicing company handling the payments and if the buyer defaults our most likely course of action would be to carry the house and resell it since it's both ethical and financially advantageous. Full transparency around these matters will be provided prior to inking a deal.
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If an investor purchased a property Sub2 and sold it via Wrap and the owner/occupant defaulted on payments, why shouldn't the investor make the Sub2 payments out of pocket until a new o/o can be found? Since the Sub2 seller is protected from the default buyer's delinquency by the investor's out-of-pocket spending, in what way is that ethically reprehensible?

We may have to agree to disagree on whether a Sub2 legally obliges the investor to make payments. I have looked on BP to find a definitive answer and cannot find one. Here are two off-BP sites that do:

http://www.lonestarlandlaw.com/subject-to-transactions.html

and

http://www.cleverinvestor.com/education/investing-in-real-estate-creatively/subject-to-sub2/

The opening paragraph of each speaks to this issue. Please note that neither site is associated with my potential mentor or his lawyer.

To be clear I recognize a distinction between what is legal and what is moral. I believe an investor has a moral obligation to make the payments. I think it probably should be a legal obligation as well....

I will PM you for your attorney's contact information, if he/she would like the referral. Thanks!

Kelvin K., thank you for sharing your thoughts. Your original idea for due diligence was one that I had not thought of, and if the deal on the table were different I would probably follow that advice. :) I'd actually prefer to discuss Sub2 issues rather than mentor issues, but since there is more interest in general about the mentoring offer, let me spell it out.

- I do not have to pay a dime for the mentoring out of pocket.

- Deals will not be in my name.

- I will get a cut of the down payment and possibly a cut of the passive for any deal in which I am involved.

- I will be involved in all deals I bring to the table via my own marketing efforts.

- He may toss me deals as well. For example, if he has too many leads to follow up on he may give me one to pursue. I will get the same cut from those deals as well.

- His LLC will be the entity contracted in both the Sub2 and the Wrap. I will be doing business under his banner.

- The contracts used are per his attorney partner who per my due diligence is a well-regarded RE attorney and investor with over 25 years of experience in DFW. My researche turned up nothing negative about either the potential mentor or the attorney.

- While all the above is going on, he will be teaching me the ropes, the legal considerations, how to use the contracts, etc.

- I will have to sign a non-disclose and non-compete with a two-year lifespan starting from the date of signature. I can do all the rehabs, wholesales, rentals and whatever else I want on my own with no obligation to the mentor whatsoever. The NDNC is specific to Sub2's. If I decide I don't like the model, I can walk away and do my own thing (as long as it doesn't involve Sub2's for 2 years).

The above is the deal on the table. I have not accepted yet and am still considering my options.

My mindset is that I am entitled to a cut for only those deals that my marketing efforts bring to the table, and am not counting on him sending any deals my way. To me, any deals he sends my way are just gravy.

To answer your question about the potential mentor's upside, that is easy: since the DP is just a small portion of the overall profit from a Wrap, I constitute relatively cheap labor. My marketing will also bring additional deals to his table, and he will be able to claim the lion's share of profits from them. He gets deals for $0 marketing dollars.

My upside is mentoring, access to legal docs already vetted by an experienced attorney, the legitimate ability to represent myself as an affiliate of a company with deep experience in these types of deals and the potential to start seeing profits before having to go through the cost and hassle of forming my own LLC or consulting with my own lawyers. Also, I have a mentor whose profits are directly tied to my success, which is a much better deal than most newbies who pay for classical mentoring get. And it is all for zero out-of-pocket cost.

Because I am not paying anything out of pocket for the mentoring and because I will not be a party in either the Sub2 or the Wrap, I do not see too many opportunities for the mentor or the lawyer to screw me over. Worst case scenario, I bring a deal to the table, he closes the deal and then fails to share the profits. If that's their game plan, it's pretty weak as far as cons go, and not even very profitable--they'd be better off financially giving me my cut so that I can continue bringing deals to the table for the remainder of the two years. Not only is there a financial downside to them by taking advantage of me, they're local, and since they also do hard money lending, etc. in the investor community, it would not behoove them for word to spread in DFW that they cheat their partners. My personal risk level in this deal is very acceptable to me.

I have not asked to review his books to determine if the 1500 deals are real, though it's an interesting idea. I have researched the attorney and confirmed his length of doing business. That is good enough for me under the circumstances. If the mentor were going to charge me $10,000 out of pocket for mentoring, I would probably want to review his books to make sure I was getting my money's worth. Since I'm paying him $0, I am content I am getting my money's worth already. ;)

If anyone has any remaining concerns about the mentor deal, please PM me. I appreciate the concern and am cognizant that someone might see something I do not.

That said, I'd like to get this thread focused on Sub2 + Wrap deals, not about mentoring deals. :) Does anyone have anything to add to Jon's thoughts about ways a Sub2+Wrap deal could go sideways? Thanks!

Bill Gulley, thank you for taking the time to write up your response. It is clear that you are highly motivated to help a newbie avoid mistakes, and I am very grateful for that.

I would welcome your recommendation for a DFW attorney.

I've spoken to the research I've spent investigating my potential mentor's firm, the numerous disclosures, the attention to compliance with SAFE and other regulations, and I'm not certain where you read that my mentor thinks it's ethical to mislead the buyer or seller. We can agree to disagree on these points. Contracts for deed are not involved.

I would be happy to explain why taking title back to the house if the owner/occupant (who is in no way a tenant) defaults and the investor can't make payments would be better than not taking title back. Without title, the original seller has no options but to suffer eventual foreclosure or make payments on a house they no longer have title to. With title, the seller could potentially avoid foreclosure by finding a different buyer, or refi the house, or deed the title back to the lender in lieu of foreclosure.

It is not my intention to "defend the deal". I am seeking additional insights from people with hands-on experience in Sub2 or Wrap deals (or at least a deep understanding of them) so that I can make an informed business decision about incorporating this strategy into my business. If I seem defensive from my habit of asking follow-up questions or responding to voiced concerns with additional information about the deal, my apologies. I value everyone's insight.

To refocus this conversation, if we assume the mentor is on the up-and-up and the deal is compliant with all regulations, in what other ways could a Sub2/Wrap deal go sideways, besides a buyer defaulting and the need to have access to funds to carry the house until a new buyer can be found? Jon Holdman's considerations are a great example of what I'm looking for.

Bill, I would be grateful if you sent me your attorney recommendation via PM. :)

Jon Holdman, thank you for expanding on your thoughts. If anything I wonder if you aren't understating the risk. It is inevitable that rates will rise and it is equally inevitable that banks will eventually eliminate their shadow inventory. I agree that at that point banks will have a financial incentive to activate their Due on Sale clauses, because they're making no real return on a 3-4% interest loan.

This could be a deal-breaker for me. I will check to see if my potential mentor has considered this and if so what their response is. If it's "at that point we walk away" then I'm out. I'm an investor, not a predator.

Shannon Grace, I will check with a separate attorney. I have already researched the potential mentor and his partner the attorney and everything I turned up was positive.

Jon Holdman, the SAFE act does apply and deals are SAFE act compliant. I know the mentor's business has disclosures out the wazoo already in place for both the seller and the buyer. The need to have funds to foreclose, rehab and carry until resell is understood.

Jon, could you please provide some detail around the risk associated with rising interest rates? Since the bank has no relationship with the new owner/occupant, I am not understanding how exactly the bank could force the o/o to refinance. And if they can, what would that do to the wrap?

Thank you both for sharing your thoughts.

PS: My potential mentor would have me doing business as an affiliate of his company for the duration of the mentorship. Any deal struck would be in the mentor's name; my financial upside comes from profit-sharing. Under a different scenario I would agree that there would be some serious concerns about the attorney's motivation level.

Wayne Brooks, thank you for taking the time to provide your follow-up.

I'm uncertain how to reconcile your statement about not having an exit strategy with my research into Sub2's. The defining characteristic of Sub2 financing is that the investor takes title while the seller retains liability. Specifically and explicitly, the investor has no legal liability for paying the debt.

If I were unable to take on those payments in the case of buyer default, I would argue that the ethical thing to do would be to deed the title back to the seller (for free). I wouldn't have to, but if I do nothing then the seller would be forced to either pay for a house he no longer had title to or not pay and get a foreclosure on his credit history. That's the worst-case scenario for him. If the house was deeded back to him he would be in a significantly better position, if not necessarily a good one.

Of course, the best thing to do is to make sure the above situation doesn't develop by keeping enough cash on hand to carry the house in case of default until it can be resold. That's the only way to really do right by the seller.

Thank you for sharing your perspective. Your comments about getting a second RE attorney to review the business model seem to be seconding Shannon's thoughts and both are pretty compelling. I will schedule some time with an attorney.

Wayne Brooks,

1) The prospective mentor's agency has completed over 1500 sub2/wrap transactions and only 3 have had "Due on Sale" clauses called. We will have a loan servicing company handling the payments and if the buyer defaults our most likely course of action would be to carry the house and resell it since it's both ethical and financially advantageous. Full transparency around these matters will be provided prior to inking a deal. Could you share any further ways the deal could go sideways for the seller?

2) Can you explain why it would not be possible to deed the title back to the owner? Or did you simply mean it's not ethical? (For the record I happen to agree that in most situations it would be.)

3) I can see where a newbie investor like myself might be able to benefit from your program. However, the knowledge-sharing, access to an established brand, legal oversight and ready access to local advice and emergency funds associated with my current offer are significant non-financial considerations.

Shannon Grace,

1) Your point about the financial advantages associated with "going it alone" (after consulting with an attorney) is well-received. It is something I am considering. That said, the less success that comes out of a profit-sharing mentorship, the less it costs me. I kind of like the idea of having a mentor whose financial success from the arrangement is directly tied to my financial success. I haven't made a final decision yet. Phil Grove is not my potential mentor.

2) If you were in my shoes, would you still get an independent attorney's opinion, knowing that your potential mentor's business partner was a RE attorney and investor with over 25 years of experience? If so, why?